After the company was spun off from
General ElectricGE -0.07656967840735068%General Electric Co.U.S.: NYSEUSD26.1
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(GE) at $19.50 a share on May 24, 2004, the stock (ticker: GNW) tilted skyward to a high of $37 in 2007, only to nose-dive to 84 cents a share on March 6, 2009; it rose to $6.15 in May 2012 when its embattled CEO resigned. The boom and bust in mortgage insurance, pricing mistakes in the tough long-term health-care business, and a failed public offering for its Australian holdings prompted the zigzags in price. Those were exaggerated by reports of sales by David Einhorn and purchases by Seth Klarman, both hedge-fund managers. By August of last year, the price of credit default insurance on $10 million of Genworth debt had jumped to $814,000 from $372,000 in April.

Thomas McInerney took the top job in January and wants to tackle Genworth's problems head-on while reducing its debt load.
Jack Fistick/Bloomberg News

But things are getting better. Genworth bowed to demands from hedge funds and recently reorganized, combining major portions of its U.S. and European mortgage-insurance operations into a single unit, reducing regulatory capital needs and walling off potential problems. Thomas McInerney, a respected former CEO at ING Groep's U.S. unit, and president of Aetna Financial Services, joined as CEO in January. He's expected to push the mortgage unit for growth and seek regulatory approval to raise prices in Genworth's long-term-care products. He's also likely to sell off businesses to cut the company's substantial debt.

"We're working under a new strategy for the turnaround over the next two years," says Martin Klein, CFO. "First, we need to improve earnings, simplify our portfolio, generate capital and build flexibility by, for example, deleveraging. Then we can think about the best ultimate combination of businesses."

McInerney's arrival and the reorganization already have helped the stock back to $9.65. Investors think the shares, which still sell for less than half of book value, could be worth as much as $18 or more.

THE RICHMOND, VA.-BASED company has three main business lines: life insurance, accounting for 51% of assets; domestic and international mortgage insurance, 32%; and international payment protection, 8%. The insurer last year posted revenue of $10 billion and made a profit of 81 centsa share, compared with $10.6 billion in revenue and 43 cents in earnings the previous year. Genworth has $5 billion in long-term debt on its balance sheet, which works out to about 25% of total capital. A more normal level would be closer to 18% for a mortgage insurer of this type.

The resurgent U.S. mortgage market offers Genworth its best chance to grow. The company insures home buyers who put up less than a 20% down payment and require added backing. With housing starts expected to grow 25% this year and existing-home sales rising 12%, according to Moody's Analytics, Genworth is in a strong position. At the same time, the Federal Housing Administration, the government entity that at times has had a 75% share in mortgage insurance, is retrenching and has seen its share fall closer to 50%. Aiding Genworth shares just last week was a statement from the acting head of the Federal Housing Finance Agency, that his group, which oversees the FHA, wanted "to encourage private capital back into the market."

The government wants to raise prices while giving up share. "That's essentially doubling the [size of the private] market, while the dominant competitor triples its prices," says Nathan Snyder, portfolio manager for Snow Capital, which oversees $3 billion.

In greater need of attention is the long-term health-care insurance business, where Genworth has a commanding 40% market share. It has proved to be a challenging market as medical-care costs rise and people live longer. Ultralow interest rates have made it even harder for insurers to fund their products profitably.

McInerney already has started the arduous task of maneuvering for regulatory permission in individual states to raise premiums by as much as 40%. Last week Genworth said it would temporarily suspend long-term-care sales in California. McInerney would like to replace existing products in the Golden State with a more cost-effective alternative that helpsGenworth's bottom line.

The Bottom Line

Genworth stock could almost double in the next year, and it sells for less than half of book value right now. Gains in mortgage and health-care pricing, plus asset sales will help.

He has several options to whittle down debt. It's expected Genworth will pay down about $1.5 billion in coming months, lowering debt from 25% to 20% of long-term capital. Asset sales will help. Private-equity firms have reportedly bid as much as $450 million for Genworth's wealth-management unit (4% of assets). Another possibility: reviving the Australian public offering, which was called off last year and could raise as much as $700 million.

Even after its rebound, the stock is cheap. At $9.65, Genworth shares trade at a mere 0.3 times book value, underscoring how dire its situation was last year. The price is eight times estimated 2013 earnings of $1.21 a share. Prior to the financial crisis, a more typical price/earnings multiple was 12-18 times forward earnings. Meanwhile earnings are expected to grow 20% to $1.45 a share by 2014.

Obviously, there are risks, including a downturn in U.S. housing or a housing bubble in Canada and Australia.

But "this stock is a solid buy, trading at such a ridiculously low level with solid assets that more than make up for potential losses," says David Marcus, co-founder of Evermore Global Advisors. He pegs the value at $18 or more. Investors would enjoy the ride to that level.